“This is unquestionably the worst global economic crisis since the 1930s”

The IMF’s latest global forecast leaves no doubt on this point. The IMF should be commended for dropping its usually measured language when circumstances, unfortunately, call for candid, vigorous prose. The IMF’s note for the G-20:

“The prolonged financial crisis has battered global activity beyond what was previously anticipated. Global GDP is estimated to have fallen by an unprecedented 5% in the fourth quarter (annualized), led by the advanced economies, which contracted by 7%. GDP declined by around 6% in both the United States and Europe, while it plummeted at a post-war record of 13% in Japan. Growth also plunged across a broad swath of emerging economies … against this backdrop, global activity is expected to contract in 2009 for the first time in 60 years.” (emphasis added)

Both the IMF and World Bank are now forecasting an outright fall in global output in 2009, with a larger contraction than previously forecast in the advanced economies and sharply lower expected growth in the emerging world. I am not sure that even Nouriel Roubini was forecasting an outright fall in global output a year ago. Anything below 2% is generally considered a global recession.

The most visible manifestation of the scale of the downturn continues to come from Asia — with the sharp fall in Asian exports to the world mirroring the sharp fall in global demand. Japan’s exports are now down 50% from last February. The IMF is now forecasting a 6% of GDP contraction in Japan in 2009. That is a contraction of magnitude as emerging economies experience during their crises.

While growth is expected to be stronger in many parts of Asia than in Japan (India and China are expected to be able to find domestic sources of growth), the trade data doesn’t alas, look at that different.

The pace of decline in Korea and Taiwan’s exports did moderate in February, but at least some of that was a by product of the timing of China’s new year. That though offers the only glimmer of hope in the Asian trade data. The y/y fall in China and Japan still hasn’t hit bottom.

Much of the expansion of global trade over the last decade — like much of the expansion in cross-border financial flows — rested on a weak foundation. It required an unsustainably high level of consumption in the US — and, at the tail end of the boom, a bit of a consumption bubble in the UK, Spain and a host of new European economies as well. And rather than adjusting gradually, the adjustment is coming far too quickly.

One last point: the IMF’s analysis (see appendix 1, and pp. 27-32) of the size of different countries fiscal stimulus is interesting. China’s discretionary fiscal stimulus is among the largest. But it has weak automatic stabilizers. Consequently, the inclusion of automatic stabilizers increases the size of Europe’s fiscal policy response, but not China’s.

If the size of the fiscal stimulus is measured by the swing in the government’s fiscal balance from 2007 to 2009, China’s effort looks a bit less impressive than say the United States effort. It is roughly comparable to Europe’s effort. The IMF forecasts a 4.8% of GDP rise in the US fiscal deficit (using their definition of the deficit, which excludes financial bailout costs), a 4.4% rise in the deficit of the European members of the G-20 and a 4.5% swing in China’s deficit.

Or to put it a bit more provocatively, big external deficit countries like the US and the UK are going to run fiscal deficits of between 8 and 10% of their GDPs, while the deficit in surplus countries like China and Germany remains between 3 and 4% of their GDPs.

The change in the fiscal balance doesn’t though capture China’s efforts to use its state banks to support local state-led infrastructure spending, or for that matter the Fed’s efforts to use its balance sheet to support consumer lending in the US.

All in all, fiscal policy clearly is being used to support global growth, as it should be. The fall in exports globally in February leaves no doubt that there is an enormous shortfall of demand, relative to the world’s capacity to produce. But the global decomposition of the stimulus doesn’t suggest that it will do much to support “rebalancing.” The surplus counties generally aren’t leading the stimulus league tables.

Opinions expressed on CFR blogs are solely those of the author or commenter, not of CFR, which takes no institutional positions.

51 Comments

Posted by charlieMarch 25, 2009 at 2:15 pm

I think the fact that the drop is abrupt is a good thing. It must scare the heck out of Asian exporting nations. Hopefully this will let them know that consistently running large trade surpluses while your trading partners run large deficits is unsustainable.

The thing that I find ironic is China prints a lot of Yuan via unsterilized currency interventions and exchanges it for USD that the US gov’t prints. The US basically trades their green paper for china’s red paper, plus the US gets some consumer electronics thrown in. I don’t know why China ever thought this would be a good idea. I know their GDP has grown, but it could have grown in ways outside of producing US consumer goods.

Posted by jonathanMarch 25, 2009 at 2:24 pm

The latest Asian export figures blew my mind. You are totally right about the “weak foundation.” My hope – pretty common – was that things would together long enough for China to become the companion consumer to the US. Darn! (snaps fingers)

One problem with the surplus countries is that their productive capacity is not always easily diverted to domestic sales. Refrigerators from Chinese factories are sized for U.S. and European households. Rural Chinese buyers prefer American brands (built in South East Asia) because they come in the smaller size that is more appropriate to rural Chinese houses.

In addition, there are strict regulations in China. When you build a factory for export goods you get easier permissions and better prices on land, but all the goods produced in the factory must be exported. Factories that also produce goods for the internal market have a hard time getting the required permissions.

Posted by QingdaoMarch 25, 2009 at 2:41 pm

Rogoff and Reinhart (Mar 21, Newsweek) focus only on the U.S.: “. . .output may take 4 years to return to its previous level” . . .with unemployment “reaching 11-12%.” After the crisis “U.S. national debt will rise by $8,500,000,000,000 over the next three years.” Assuming this is roughly accurate, will Chinese exports to the U.S. quickly return to earlier levels? This, apparently, is the assumption behind the V shaped consensus view of how China will “lead the world out of this recession.” If exports do not rebound, that leaves domestic investment and consumption. A year or so ago there were those at the Carnegie Endowment, Economist Magazine and World bank who rejected the “myth” that China was driven by exports, therefore all the talk about the value of the rmb, hot money flows and resultant foreign exchange surpluses were beside the point; most of that 10-11% growth was due to domestic factors. The World bank now predicts 6.5% for 2009.

Posted by gloryMarch 25, 2009 at 2:57 pm

this belongs in the thread below but check out the yuan NDFs today! (or at least the ETF of them it’s at its highest level in eight months — looks like china is sending US a little msg…

also fwiw, re: SDRs, lex sez – “Theory is one thing, however. In reality, currencies live and breathe more than just short-term economic air. The two other life forces for a reserve currency are sovereign credibility and power…”

Posted by bsetserMarch 25, 2009 at 3:23 pm

glory — the ndfs were pricing in a much much larger appreciation back when the rmb was appreciating v the usd. the end of expectations of rmb depreciation is in my mind a good thing, not a “message” — the most parsimonious explanation is that the recent bout of dollar weakness has made it easier for china to hold to its $ peg.

Brad: India and China are expected to be able to find domestic sources of growth

Me: The external sector is a negative contributor to GDP in India, has been for quite a long time as far as I know, i.e. imports > exports. The 8% or so GDP growth in India during the boom was a result of an expanded domestic Indian economy, when looked at in toto.
But “GDP growth” percentages are not a good indication of actual economic conditions. e.g. a seamstress earning Rs. 3,000/= per month in Bangalore due to the textile export boom is now fired. It’s hard to know the GDP impact of such events in the aggregate. In any case that seamstress was, and will continue to wear, a simple cotton dress, usually well cleaned but never pressed. She couldn’t ever have thought of having those exquisite gowns that she stiches for the European Master Races on her own back.

Posted by gloryMarch 25, 2009 at 3:35 pm

yea, you’re right of course still, the NDF move i think is indicative of at least a change in mood on how china views its ‘peg’ wrt its increasingly vocal concerns about the dollar… in any event, looks like yahoo has RT spot quotes!

oh and apparently i have a ‘comment awaiting moderation’ … is that anything you can look at?

Japan’s domestic automobile sales peaked in 1990, and are 30% lower now. They have no hopes for domestic growth and its not surprising that are getting hit the hardest, so far. That said, their businesses/elite are not oriented to the liquidationist mindset, which is why unemployment remained comparatively so low in the 90′s, until now, and society does not appear to be openly ravaged. I would say that’s generally true of most East Asian countries, including China.

When you compare stimuli size, you compare Europe and the US. But then you single out Germany as a surplus country that should do more.

However, the Eurozone in total has no surplus (it has run a modest current account deficit for quite a while now), and you yourself have pointed out that its stimulus package is similar in size to what the US and China are doing.

Does it make sense to single out Germany, when the Eurozone actually has a deficit? With the same logic, you could argue that Missouri is a surplus state and California is a deficit state, and therefore Missouri needs to stimulate more than California does.

Regarding Purple’s comment about Japan’s society not being “openly ravaged”:

Recently, there have been many editorials in the German press (even in the German edition of the FT) that people shouldn’t be too bothered if GDP drops 5 % or more, because all in all, people have all they need and all sorts of stuff they don’t really need, and the ones that are badly hit by the crisis can be helped by the government. The German president made a speech a few days ago and also said something to the extent that we should stop our fixation on economic growth and learn to live with less. By and large, many people seem to agree, and Germans appear quite relaxed about the whole crisis. So far at least.

Mindsets differ from country to country…

Posted by gloryMarch 25, 2009 at 4:41 pm

well not only in the german edition, but in the UK as well (even from the LSE

i’ve heard mindsets described as bike/shark stable vs. table/chair stable — like whether you have to keep moving or not; arguably, say if you believe in another LSE luminary, industrial society will collapse if it does not keep ‘growing’…

arguably, i would say that’s exactly what is happening! more importantly, however, in a post-industrial world, how does one identify ‘growth‘?

Posted by thinkerMarch 25, 2009 at 4:45 pm

Brad-

hopefully next year at this time the subject won’t be.

“Worse than the Economic Crisis of the 30′s”

50/50 odds…..

Posted by bsetserMarch 25, 2009 at 4:59 pm

Thomas — you are right that I jumped from the EU (actually the EU members of the G-20) to germany. that is b/c the imf didn’t publish its estimate of the combined EU fiscal position, only the incremental stimulus. It is also true that the EU entered the crisis with a small external deficit. that deficit tho will fall naturally as commodity prices fall, so i wouldn’t be surprised to see a surplus emerge, especially in the absence of a big enough stimulus.

far more important tho is the need for adjustment inside europe, as the deficit countries in the eurozone and europe need to reduce their external deficits, and that would be far easier is there is demand growth in the surplus countries.

Posted by gilliesMarch 25, 2009 at 5:06 pm

learn to live with less ?

germany suffered famine within living memory – for a period after the second world war. i do not know about japan, but cannot imagine that life was easy at that same period. folk memory stays with the generation that went through it.

and no one has defined “worst” in their assessment of the “crisis.”

i suggest that this will be the largest fall in living standards ever – but not to the lowest level of living standards ever. in a deflationary scenario we (the developed world) have a larger percentage of discretionary spending, we have enjoyed a greater income surplus over the cost of basic food and basic necessities than ever before in history.

i do not know how to say this in economic terms – but we in the developed economies simply have more surplus body fat to lose than a citizen of the 1930s had to lose. many people literally so.

- and since exponentially growing resource consumption cannot in any case be sustained for long in a finite biosphere, let me amend brad’s headline :

“this is unquestionably the best opportunity for economic rethink and reform since the 1930s.”

Posted by curiousMarch 25, 2009 at 5:57 pm

wolf is correct, exports falling off a cliff and will likely continue to do so.

what i am puzzled by are a few of Geithners remarks…

Credit and consumption are what caused the crisis, yet every time i hear him and obama speak they say we need “more credit, we need more consumption”.

Is this insanity? Or is it just me?
These guys are adding fuel to the fire, and it won’t show for a few months but once all these $$$ enter the real economy we’re going from a deflationary collapse to hyperinflationary nightmare.

Qingdao: A year or so ago there were those at the Carnegie Endowment, Economist Magazine and World bank who rejected the “myth” that China was driven by exports, therefore all the talk about the value of the rmb, hot money flows and resultant foreign exchange surpluses were beside the point; most of that 10-11% growth was due to domestic factors. The World bank now predicts 6.5% for 2009.

And recent events don’t prove this view wrong. The Chinese government started cooling the economy at the end of 2007, with the goal of reducing domestic GDP growth. That gets you from 11% to 9%. Then you get hit by the credit/export crisis and that 9% goes to 6.5%.

Chinese smart again? Like I said, those Chinese reserve managers should apologize and then do ??? Complaint and whine is just not proper. Think about it, what would you do if you have money, you invest in yourself, then take offense and make investment and diversify (globally, across capital spectrum, asset class, multiple currency). lazy to do it what is necessary provide safehaven to your money and lock into one currency is no excuse.

Posted by Rien HuizerMarch 25, 2009 at 6:49 pm

Brad,

With all due respect to to luminaries who did not forecast (publicly) what they now see unfolding (remember that we disagreed about world growth prospects back in august 2008), declaring a contraction that has just spread outside a distincly unhealthy cluster of industries around residential construction (an industry doomed by demographics in most of the developed world) and the pruning of the financial services industry beyond what honest people need, two sectors that will struggle to match the annual output levels reached in 2007 anywhere until 2015 or so, I do not think that we have a problem on the scale of the great depression. Of course, it can be made worse, but for the time being all e should do is to redeploy surplus labor and replenish deficient capital here and there. But expecting a move from contraction to slow growth, or perhaps a very shallow oscillation during the next ten years, at output levels of say 2007/8 (a very good performance assuming a structural contraction in OECD construction and financial services by 30-40%) lasting for at least 10 years, looks OK. By then people will not feel poor (they will be more affluent than in 2005) but they will carry scars that will last for a generation. And the LDCs will have added some 60 million futureless souls.

But it had to happen sometime.

On a more practical note, what is happening in Japan and its former colonies and what the statistics tell us does not really make sense. A country like Japan with imports representing around 10% of GDP and exports a bit more, taking into account that the majority of large Japanese exporters are market leaders, cannot contract that fast unless there is something mysterious going on in the domestic economy (which is very poorly represented in Japan’s national accounts). It is all a bit too scary to be true.

Posted by yodaMarch 25, 2009 at 6:50 pm

huge reserve is no different from portfolio. how do you build safehaven portfolio, you put work to diversify, minimize risk of loss, and probably make some money. mostly invest in yourself, so you can earn greater cash-flow in future. lock into one currency and cry and whine about currency loss is pathetic.

Posted by QingdaoMarch 25, 2009 at 8:50 pm

twofish: does that mean you agree that China will grow 6.5% in 2009?

Posted by DORMarch 25, 2009 at 9:05 pm

The speed with which global forecasters have revisited their crystal balls is truly amazing. In April, the WTO predicted +4.5% real growth in world trade in 2009. In October, the IMF said +4.1% but revised it to -2.8% in January. This month, the WTO is saying -9% “or more.”

This is not a recession, correction, contraction, down-turn, slump or buying opportunity. This is serious.

I think it will be somewhat higher. If I’m right about what is causing the Chinese contraction then things will grow very quickly after Q3 as the stimulus hits.

Posted by brandonMarch 26, 2009 at 7:59 am

Brad,

This is probably a dumb question, but where exactly are you pulling that export data for the Asian countries? Their respective gov’t data sites? (e.g. Cabinet Office in Japan, etc) or something like the IMF’s statistics pages?

I’m trying to find some good data on intra-Asian trade and wanted to ask where you were looking. After all, imitation is the sincerest form of flattery!

Thanks for any help you could provide.

Posted by bsetserMarch 26, 2009 at 8:37 am

Brandon — I used bloomberg’s economic data set, which come from national sources.

Posted by bsetserMarch 26, 2009 at 8:41 am

if everyone was just 5% poorer, it wouldn’t be a total disaster — though it would imply that a lot of productive capacity is unused. but the distribution of the pain isn’t even. some people are doing just fine; others don’t have a job and thus don’t have income.

and judging from the financial sector’s difficulties adjusting to a pay structure that is more in line with the industry’s real profitability across the economic cycle, i don’t get a sense that Americans are quite as willing as Germans to think that a bit less income is something they can absorb. A host of those in the financial sector worried about the sustainabiliy of their bonuses — and more generally the sustainability of a level of compensation that meant many were very well paid — aren’t at risk of material poverty either.

Your chart showing the drop-off of Asian exports is exactly what would be expected from a depression that is caused by global imbalances (as I noted when I predicted this depression in your blog on October 6 and in my own blog on October 7).

Posted by David HeighamMarch 26, 2009 at 9:59 am

Brad Setser

Maybe yo uare a bit woozy from the spectacular trade drops? This is from a WSJ blog post:

“Which economists were puzzled? When letters of credit, etc., and loans to finance stocks became hard to come by, international trade was sure ot fall more than in the usual ratio to decline in activity. In a globalised economy, this reinforced the usual recession rundown of stocks, much of which are nowadays in the trade pipeline and not booked as stocks in anyone’s national accounts. That the phenomenon would occur seemed a no-brainer.”

That this is theworst since the 30s has seemed anothe no-brainer, since about last October.

Posted by jonathanMarch 26, 2009 at 10:33 am

Brad, I think much of the whining from Wall St is ignorant. There’s a general idea people will leave if they can make more but that’s true if you’re comparing one bank to another.

1. Show me the field where a physicist, mathematician or economist is going to make … well, without Wall St are there any outside of a few tenured professors and successful authors who make $125k a year anywhere at all?
2. Most of the people making big dollars are salespeople and traders.** Not many can go out on their own.

Wall Street culture self-values an individual’s worth much higher than any other person would value them at.

**And this brings up another peeve, the idea that innovation would flee. How many innovators actually exist compared to the legions who use their computers and proprietary trading systems – which they didn’t write – and their Bloomberg? The guys who write the code aren’t the highest paid. It’s generally the salespeople and traders and that is not innovation.

Posted by brandonMarch 26, 2009 at 10:44 am

Thank you, sir.

Posted by babarMarch 26, 2009 at 11:36 am

@brad ..don’t get a sense that Americans are quite as willing as Germans to think that a bit less income is something they can absorb. A host of those in the financial sector worried about the sustainabiliy of their bonuses

the problem is that a lot of people made obligations (ie took on debt) based on the cash flows they received in the past four years plus the amount of financial leverage they were able to get in the past four years. as both of these are not going to be sustained there will be a lot of pain in the financial sector. so if there is a drop of 45% in compensation (say 30% fewer jobs, each paying 25% less) you will see crushing ripple effects. nyc could go through a debt-deflationary cycle that could be quite painful. but maybe the amount of old cash sloshing around nyc will cushion the blow as well.

that being said, it is going to happen. nobody on wall street likes the effects to them personally but i wish people would just accept it as done and move on. if you are working on wall street and didn’t love it, find something else to do that will make you happier even if it pays less and the whole world will benefit. it’s likely it will happen anyway. but you’re right, the whiners are the most vocal right now.

jonathan: Show me the field where a physicist, mathematician or economist is going to make … well, without Wall St are there any outside of a few tenured professors and successful authors who make $125k a year anywhere at all?

US$125K is highish, but it’s not insane for a physics Ph.D. outside of academia. High end C++ programmers at google and Microsoft make about that much money. The attraction of finance for a physicist is that there is much less of a glass ceiling. You can make $125K as a programmer at Microsoft, but are you not going to make $250K while doing “geek work.”

jonathan: Most of the people making big dollars are salespeople and traders.** Not many can go out on their own.

Actually they can. It’s not terribly hard to start a hedge fund, and one of the thing that Geithner is trying to do is to make sure you don’t kick the investment banks while at the same time encouraging hedge funds.

jonathan: Wall Street culture self-values an individual’s worth much higher than any other person would value them at.

Depends on the firm. Firms have very different cultures. Some are known for have a “cowboy” culture while others emphasize something of a “hive mind.”

Also “Wall Street” is a very odd misnomer, since there is hardly any finance on Wall Street any more. The NYSE is there, but trading is increasingly electronic. The big banks have mostly moved to midtown, and the hedge funds are in Connecticut and Long Island.

For a hedge fund, “Wall Street” means big and bureaucratic, and hedge funds move out of NY to get away from the Wall Street culture.

Posted by YingMarch 26, 2009 at 1:44 pm

Agree with Brad’s point that pain is not equally suffered by all the people in recession. The major issue lies in income distribution. Americans have no trouble to weather the recession if it can tackle this long standing problem. Despite of being the richest country in the world, there are still large number of population living under the poverty line.

China started to tackle the same problem and losers of exporter sectors were mostly not compensated recently. There are new policies to tackle corruption and unjustified income distribution. Efforts has been made to make income more equally distributed across different sectors with public pressure. It looks like to me that China will be able to keep itself together despite the huge challenges it faces. It is amazing to see that people in the east are generally optimistic about the future and trust the ability of its leaders to weather the storm. I bet that China will be the first one to come out of the recession though it might take at least five to ten years to do so.

Posted by YingMarch 26, 2009 at 2:02 pm

It is not a smart thing to pit China and US against each other. It certainly is not a prudent behavior for a major newspaper to pick and choose the wordings of a certain Chinese to flair some hostile sentiment towards each other. After all, US and China are partners in a global economic system. Assigning blames to each other will not help either. Peaceful negotiation with the interest of people in both countries in mind must be the only solution.

Funny how even the debate here, on this page, has a strange socialist air. As if pain in recession should be shared out equally. Suddenly we are all egalitarian…

Posted by YingMarch 26, 2009 at 2:20 pm

There is nothing to do with socialism. It’s more to do in defending and preserving capitalism system.

Posted by jonathanMarch 26, 2009 at 5:26 pm

Twofish, I don’t normally rant or address comments on this blog, because it’s Brad’s blog, but I agree with in part – I picked the $125k number because it’s in the top range for numbers geeks – and disagree with the rest. First, I’m quite familiar with financial firms … as a client on the deal side (not the retail side) and I’ve been involved in a number of firms that trade (again, not as a retail client because that’s not experience). We can disagree about whether people can actually go out on their own or start funds or even work at smaller places – but most people aren’t nearly as good when it’s their risk not the firm’s and the best era for raising money fast and easy is surely done for a while.

More importantly, I can illustrate my point with a simple example or two. I close a deal with a large financial firm and their fee is based on what? Not the hours put in? Not the value added – and I’ll argue that point to the death – but on the simple reality that they are closer to the flow of money and that closeness allows them to price by the percent, with minimums, etc. The best people at the firms I’ve dealt with understand the market makes them the money, that if a deal prices it’s the market that prices and a good firm can’t turn a sow’s ear of a deal into a silk purse. Most of the money made is like a tax imposed by the troll under the bridge who demands payment to let you cross. A client can’t sell into the market, often can’t connect one source of money with another without these middlemen who then take a cut. Clients are kind of like fishermen who bring their catch to dock to get paid 30-40 cents a pound by middlemen who take the fish to market. The fishing is the really hard part but the middlemen connect the goods to the public.

I remember when the first NYC law firm charged by percent not by the hour. Radical richness followed because when you’ve made yourself part of the flow of capital you’re priced into the deal above the line, meaning your cost is figured right out of the gross and not as a cost of closing.

It’s not the various cultures at the firms but the increasing velocity and leverage – two sides of the coin there – which has made deals bigger and faster. And that goes for trading as well as investment / lending work. The bubble in credit, in capital flowing to and fro, has made a bubble in pay because little slices of this giant swirl of cash not only generate a lot but become part of the flow.

As an aside – and apologies to Brad again – investment lending deals are made not only by financial firms but by work at the client. My experience has been that low to average paid people on the client side contribute far more actual value to the process … and then that’s viewed as part of their job not as something deserving of a large bonus. Again, it’s not the work but the closeness to the capital flows which has driven compensation. No one really begrudged until this bubble. It’s ridiculous that financial workers don’t understand that.

Posted by anon1March 26, 2009 at 5:53 pm

Brad,

Good interview on BNN. They liked it.

You sound a bit like Larry Summers.

Posted by PMMarch 26, 2009 at 6:38 pm

“Does it make sense to single out Germany, when the Eurozone actually has a deficit? With the same logic, you could argue that Missouri is a surplus state and California is a deficit state, and therefore Missouri needs to stimulate more than California does.”

I cannot understand why so many Europeans (I don’t know if you are one or not) labor under the significant confusion that member nations of the EU are in some way comparable to states of the U.S. While the EU may be an aggregate economic entity, it is vastly different in important ways from the U.S., and I simply cannot grasp this confusion.

To jonathan: There are lots and lots of different parts of finance which very different attributes, and what is true for one part of an investment bank is not true for another.

The environment for doing mergers and acquisitions is completely different from selling vanilla stock options. In the former case, it’s very relationship based. In the latter case, it’s not, since people will just go to the broker with the lowest cost. At that point what matters is if you have the technical systems that gets things done fast and cheap.

jonathan: Not the value added – and I’ll argue that point to the death – but on the simple reality that they are closer to the flow of money and that closeness allows them to price by the percent, with minimums, etc.

That’s only if you get some sort of monopoly on the flow of money. The problem is that you are competing with lots of other people that can try to get a piece of the pie. In some situations, there are so many people that can come in that you just can’t make any money by large fees on small a small number of deals.

If you want to do just straight order execution for small trades, then it becomes very, very cost based. At which point the only way you can make money is by making a huge number of trades, very fast. because the margins are so tiny.

jonathan: Again, it’s not the work but the closeness to the capital flows which has driven compensation. No one really begrudged until this bubble. It’s ridiculous that financial workers don’t understand that.

Again it depends on the firm and the job. There are a million ways of making money, and you see all of the in action on Wall Street. There are parts of Wall Street that are extremely technology based, and parts of Wall Streets that are extremely non-technology.

Posted by rababMarch 26, 2009 at 6:56 pm

twofish:

yes, but the common theme is access to capital and access to the liquidity in capital markets. ie access.

Posted by gilliesMarch 26, 2009 at 6:56 pm

this is bad, yes – this is very bad, yes – but the comparison with the 1930s is only a distraction if it turns out to be an event of a different kind, whatever the magnitude.

we have come to take “progress” – economic growth – for granted. we should be warned by what happened to some who took growth in house prices for granted. we talk about V shaped, U shaped, L shaped recessions, but perhaps the shape unfolding before us is not in the alphabet – it is an over the hump shape.

at some point the empire of global industrial growth has to go into retreat. the system has to decline as the energy resources available to it go into decline.

just as the property markets – whether in california, ireland, spain or coastal china – run out of new buyers and go into reverse, so does economic growth require ever increasing new inputs of energy.

globalisation simply may not work in a long term contraction scenario. outsourcing may not be politically possible under sustained high unemployment.

when we went to the moon we called it the conquest of space, but that was another hump. that was as far as we went.

i propose that this may be the worst long term slump since ‘the second intermediate period’ of ancient egypt 1650 – 1550 b c.

We saw it first:
The air pollution in Hong Kong has been far milder than usual. The reason is that many of the factories upwind from us in the PRD are either closed or using electricity from the power grid. When business booms, the grid is supplemented by nasty factory generators, and we get the ill effects.

(Actually, my FIRST tip was a tiny August 2007 article about a US mutual fund that was extending the time needed to take cash out of money market accounts from two days to six weeks. Not a good sign.)

= = = = =

Jonathan,

I’m an economist at a private NGO (and not involved in sales or trading), but I’d probably do something else if I only made US$125k a year.

Come on over, the water’s fine out here!

= = = = =

gillies,

Before you toss out “progress – economic growth,” would you please make sure we have something else – something equally reliable and robust – to replace it? See, billions of people around the world are counting on “progress – economic growth” to drag themselves out of poverty.

Before you dismantle the most successful poverty destruction system ever created, make sure you know what comes next. The poor cannot afford any mistakes.

It tends to kill them.

Posted by dfMarch 27, 2009 at 4:16 am

I ve long said that since the debt/GDP ratio was already higher in 2008 than in 1933 after a fall of the US GDP of 50%, the coming crisis is bound to be worse than the one of the 30′s.

I bet on a fall of industrial production of 70% at the least.

The fed has finally brought the helicopters in, but i still wait to see if Bernanke and Obama have the guts to confront China and even more, the guts to let the world drop the dollar as the international currency.

Because that s the choice the US are now facing. Just like UK post 1918.

Posted by dfMarch 27, 2009 at 4:30 am

OK I just checked, GDP fell 20% in the 30′s in the biggest countries. I bet on a fall of 40% in OECD and on a somewhat bigger fall in China, since China is the land of investment and investment is what hit first.

Unless of course the governments enact smart policies but nothing smart as been put forward to prevent the debt build up, so I hardly see how suddenly something smart would pop up.

df: I ve long said that since the debt/GDP ratio was already higher in 2008 than in 1933 after a fall of the US GDP of 50%, the coming crisis is bound to be worse than the one of the 30’s.

And I’ve always argued that “total debt” is a meaningless number that is often very misunderstood. If you save money in a bank, you’ve created debt, as the bank now owes you money.

Also money is a collective illusion. If you have the productive things there (like factories and people) then all you have to do is to figure out what computer keys to press in order to redistribute things.

A high “total debt” is very easy to fix. If I owe you a trillion dollars and you owe me a trillion dollars, then we just shake hands and we both agree to cancel each others debt. The tricky things happen when I owe you, but you don’t owe me.

So ironically, we are in good shape if everyone is indebted to everyone else. If you have A indebted to B but B not indebted to A, *then* we have problems.

Posted by Judy YeoMarch 28, 2009 at 8:41 am

There’s probably a group of foreigners feeling worse than anyone else right now. Their investment in export oriented factories are more or less severely impaired. The havoc in currency markets is hardly helping repatriation efforts. The sale of property could hardly go well in such a market. A real sign of how global the mess is is how these people are now wondering if staying put is any riskier than leaving for their home countries.

Posted by dukeMarch 28, 2009 at 9:07 am

Wrong on several counts but even if it were true that nett debt could sort itself out, the theory fails when we consider toxic CDOs.

For the first time in history the world economy is poisoned by debt no-one can price to market and indeed are afraid to.

How can economies survive when the trillion dollars i thought i had turns out worthless?
How does that affect you when the trillion you loaned me was backed by garbage assets?

Posted by dfMarch 30, 2009 at 5:02 am

Twofish, I m not counting savings in banks, only debt from agents between them and between them and the bank.

“cancelling” debt is not that easy, with or without savings taken in to account.
For instance if as an auto company I sold by products to consumers on credit, if I am indebted to part makers and part makers have promised to pay wages and severance packages to their workers, who are buyers of cars.

Do you think it ll be easy to tell workers to forget about their severance package in exchange of forgetting about their car debt.
And what about those without a car ?
And why should each of them individually not prefer to turn bankrupt, and if that happens what happens to those securizing debts etc.

The thing is production is based on assumptions of future payment. Once confidence is gone, so goes production.